Getting laid off is never a pleasant thing. However, getting laid off with a severance agreement is way better than quitting a job with nothing!
Too many people quit their terrible jobs today when they could have negotiated a severance. In 2012, I negotiated a severance from my job of 11 years that paid for five years worth of living expenses. I got all my deferred cash and stock compensation. If I quit, I would have got nothing.
But before you sign your severance agreement, it's good to do several things first. Here are some recommendations as a severance negotiation expert who wrote the book, How To Engineer Your Layoff, now in its 4th edition for 2020 and beyond.
Things To Do Before Signing A Severance Agreement
1. Consider Hiring An Attorney
Depending on how much money you earned, you may need to seek legal advice. The more you make, the more hiring an attorney is worth it. It's the same concept of hiring an attorney if you're going to buy a multi-million dollar property.
I recommend hiring an attorney once your annual income surpasses $500,000 a year. An attorney may cost $3,000 – $10,000, but he or she could help negotiate tens if not hundreds of thousands in severance payment for you.
The alternative is to simply buy my book on how to negotiate a severance and save yourself thousands.
2. Spend Time Understanding All Your Rights
You may not feel like you have a lot of rights, but you do. One of the biggest mistakes employees make is not taking the time to understand their rights.
Read your employee handbook, ask HR about your rights as an employee, and ask about what other type of help you deserve to get. The longer you've been employed by your firm, the more you should be able to ask for accommodations.
3. Get Ahead Of The Curve
If the writing is clearly on the wall and it looks like your employer may be laying you or your department off in the near future, it’s time to prepare. I recommend having a meeting with your human resources manager and building a strong relationship with him or her long before you are called into a glass office and told your services are no longer needed.
Employees should be well aware that their company may be planning a mass layoff due to poor revenue or stock price performance. Seriously, if your company's stock price is down 20% or more in the year, it's almost a certainty layoffs are coming.
By the time a company announces plans for a layoff, it may be too late because managers will have already pegged who they plan to downsize.
4. Analyze Your Severance Agreement
Some workers think they’re getting a severance package when they really aren’t. Instead, what they're getting is mandatory WARN Act pay.
WARN Act pay is a labor law that mandates employers pay anywhere from one to three months’ worth of salary if an employee is to be let go in a mass layoff (100 or more employees).
A severance package is money in addition to WARN Act pay. I’ve spoken with many laid-off employees who said they got a two- or three-month severance. Little did they realize that they really got no severance, just what was due to them by law. Learn more about the average severance package here.
5. Make One Last Ask
When you get a severance package, you are usually given several days up to a couple weeks to sign the agreement. If there are some parts of the severance agreement you don't fully agree with, it's worth going back and asking for more concessions.
The worst they can do is say no. It is highly unlikely they will go backwards and take concessions away if you ask. Companies nowadays are afraid of social media backlash and lawsuits. Therefore, companies will do their best to try and take care of their employees.
At the end of the day, if there's no concessions, you will have no choice but to sign the severance and move on. You don't want to piss off your old employer when it comes to finding a new job. Further, gaining a severance is so much better than getting nothing.
6. Clarify The Timing Of The Severance Payout
One area you should ask about is how payments are made. I recommend requesting a lump sum rather than payments that are spread out over a set period of time.
As long as severance money is in the corporation’s hands, you are at their mercy. What if you find a job at a competitor while your severance package still has one more year left of payout. Although the chance is small, there is a chance your old employer might withhold the rest of your severance payment.
Because your old employer agreed to lay you off, you should feel free to find a new job the very next day your severance payment clears. You don't want your employer clawing back any severance or stopping any deferred stock or cash compensation just because you're now in direct competition. They laid you off. Don't forget! You have every right to battle them and make them regret their decision.
7. Understand All Terms And Conditions
There are certain clauses you’ll need to watch out for when reviewing your severance agreement. Breaking any one of these clauses could violate the terms of your severance and cause you to lose any deferred compensation or force you to pay back some severance.
These are the most problematic clauses which I assist clients to re-negotiate:
Release of Claims: All severance agreements include a release of claims clause. This is where you sign away your ability to pursue legal claims against your employer. If you have a valid legal claim against your employer, then agreeing to release your legal claim will be financially damaging. However, if you don’t have any current legal claims against your employer and don’t foresee any future legal claims, this is a standard clause to sign off on.
Non-compete: A non-compete clause will prevent you from directly competing with your employer for a specific time period. This clause can also prevent you from hiring away other employees from your employer. You can negotiate the terms of this clause to reduce the time period and narrow the geographic region where the clause applies.
Proprietary Information: A proprietary information clause prevents you from using any of your employer’s proprietary information after you leave. If you helped create and develop proprietary information, you may be able to negotiate exceptions to this clause.
Integration: An integration clause means all agreements between you and your employer are contained to the written severance agreement. This can be a problem when employers make verbal promises regarding severance terms which are not included in the written agreement. This clause means your employer doesn’t have to follow through on any verbal promises.
Speaking ill: Every severance negotiation will have wording that states you agree not to speak ill about the company or sue the company. The company has the utmost desire to protect its reputation from a disgruntled employee.
See: Why A Severance Is Possible: Absolute Reputational Destruction
Once you sign a severance agreement, you need to make sure that you stick to the terms. Slipping up and breaking one or more of the clauses can have some undesirable consequences. You want to be careful not to go back on your word.
Here are the repercussions for breaking the terms of your severance agreement.
Non-disclosure clause (also known as a confidentiality clause): An employer can sue you for breaching the terms of the confidentiality clause. If your employer wins the lawsuit they can obtain a judgment for monetary damages against you. Also, if the breach of confidentiality leads to any type of theft, there could be criminal charges and penalties.
Non-disparagement clause: A non-disparagement clause would prevent you from publically badmouthing your former employer. With the advent of social media it is easy to find proof of disparagement if you go on a Twitter rant complaining about your employer. The penalty for violation of a non-disparagement clause is that your employer could sue you and demand that you repay any severance money received.
A Severance Agreement Could Be Your Biggest Blessing
There's not a day that goes by where I'm not thankful for my severance package. I agreed to 3 weeks of pay for every year I worked plus all my deferred cash and stock that equaled more than half a million dollars.
Since negotiating my severance in 2012, I've been able to travel to 25 new countries with my wife, work on my tennis game, grow Financial Samurai into one of the top personal finance sites in the world, and become a first time father in 2017.
I hope nobody ever quits their job, but gets let go. I have refined my severance negotiation book over the years to be the #1 resource for anybody who wants to leave a job they dislike to do something more meaningful with their life.
You can buy my latest edition of How To Engineer Your Layoff here. Input “saveten” without the parentheses to save $10 immediately.
About the Author: Sam worked in investment banking for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.